Question

Evidence from studies comparing employment in adjacent states and counties with different minimum wage rates show that increases in the minimum wage rate have little or no effect on employment. If anything, an increase in minimum wage seems to cause a slight increase in low wage employment. There are at least three ways of explaining this fact:

35. How does the price adjustment mechanism with income changes explain this fact?

36. How does the wage-productivity adjustment mechanism (a use of the efficiency wage framework) explain this fact?

37. How does the distribution of income adjustment mechanism (another use of the efficiency wage rate framework) explain this fact?

38. Essay: The United States has become a throw-away economy. Rather than pay to repair something, people dispose of it, replace it with something new. Why? Explain the economics behind this tendency.

Answer 1

35. How does the price adjustment mechanism with income changes explain this fact?

Real wage rate is the wage of the employees adjusted to inflation,if the government makes a rule on minimum wage this will result in inflation and suppose if the cost of goods have raised by 25% this will make the real wage rate not enticing enough to reduce the unemployment and wage increase as by the minimum wages rule will become irrevelant.

36 .How does the wage-productivity adjustment mechanism (a use of the efficiency wage framework) explain this fact?

Markets operate in equilibrium based on the demand and the supply,buyer needs to have a higher valuation than the seller for the trade to benefit. This is how economics create value.

The minimum wages interferes with this principle in unskilled labor market,it reduces the unemployment and it reduces the number of transactions in the market,because voluntry transaction generates surplus and minimum wages reduces the number of transaction and reduce the economic value added.

a) no minimum wages b) with minimum wages leading to dead weight loss.

37. How does the distribution of income adjustment mechanism (another use of the efficiency wage rate framework) explain this fact?

In a closed economy the equilibrium level of national income occurs when

Y=C + I where Y is the output and C is the consumption and I is the investment.

in case of export import economy then Y is given by

Y = C + I +X -M where X and M are export and import respectively

if the economy operates in full employment Y no longer can increase,it leads to fall from  full employement hence the people income ,consumption falls and reduces the consumption and investment leading to fall in output levels and economy will return to labor market equilibrium.

38.Throw away economy is due to raise in real income/wages of the people,The throw-away economy refers to the prevalence of consumer goods which only last for a short period of time. When they stop working / no longer relevant, we throw them away and replace them with new goods.This is in contrast with countries where resources are scarce and goods last for considerable amount of time.Throw away economics is due to over consumption and excessive production.